Yahoo’s Sisyphean Struggle Against Plunging Ad Prices

Ever wonder why all of your favorite websites are suddenly serving up more video? Look no further than Yahoo’s latest quarterly earnings for an answer. The company announced that its profits and revenues had both dropped year over year, thanks in large part to the deteriorating value of display advertising, which makes up 38 percent of its business.

See this graph? It comes from the Yahoo's earnings presentation, and depicts the Sisyphean struggle it's locked into at the moment. The company is selling more ads, yes, but for ever cheaper rates. This quarter, sales jumped 24 percent, but prices fell by an equal amount. Add it up, and total display revenue was down 7 percent. It’s one step forward, 1.07 steps back.

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Those MF-ers are not just serving videos, they are serving autoplay videos. More...

There are a couple of reasons why display ad prices are sliding at Yahoo (and plenty of other companies that are in the masochistic business of selling advertising next to journalism). First, there’s simply more competition from social networks, with their vast troves of user data. Beyond that, media buyers have technology on their side thanks to ad exchanges, which let them look at inventory across the entire media market and pick the best value. Yahoo is trying to fight back by investing in higher-end online magazines so it can offer more native advertising, which marketers treat as less of a commodity. Of course, they're just playing catchup to sites like Buzzfeed in that space. And in the end, it’s hard for anyone to command much for their advertising space with such a massive throng of websites competing and driving prices down.

Which brings us back to the topic of moving pictures. While the market is swimming in text, advertising executives will tell you that clients are desperate to run commercials on glossy, high-production online video, in part because audiences can't skip them. Yahoo has responded by buying the rights to original television shows, including a new season of Community, to complement a news operation fronted by Katie Couric. It's a big-budget version of a strategy that much of online media is already chasing—which isn't a great place to be if you're supposedly a tech company first.

Jordan Weissmann is Slate's senior business and economics correspondent.